Salesforce.com, Long-Term High Growth Expected Despite Stock Price Slump

4Q Company Guidance Below Market Expectations
Approximately 10% Decline Over Last 5 Trading Days

Short-Term Concerns Over Omicron and M&A Costs
Long-Term Outlook Positive Due to Digitalization Demand and M&A Effects

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minji Lee] Salesforce.com is expected to show a declining stock price trend in the short term due to concerns over margin decline, but in the long term, it is projected to follow an upward trajectory supported by corporate demand for cloud transition.

On the 5th, Salesforce.com's stock price was recorded at $258.32, showing a decline of about 10.78% over the past five trading days. The larger drop in stock price is analyzed to be due to the company presenting guidance for the fourth quarter that fell short of market expectations.

In the third quarter (August to October), revenue and Non-GAAP EPS were $6.86 billion and $1.27 respectively, exceeding market estimates by 0.9% and 38%. The overall revenue growth rate increased by 26.6% compared to the same period last year. By segment, sales grew by 17.3%, services by 20.5%, marketing and commerce by 58.5%, and platform and data by about 19.6%. The contract backlog (PRO) at the end of the third quarter recorded $36.3 billion, an increase of about 20% year-over-year. Researcher Yongmin Cho from Shinhan Financial Investment said, “Digitalization demand continued, and the effects of new business pipelines and mergers and acquisitions were reflected, accelerating the pace of external growth again,” adding, “EPS declined compared to last year due to the increase in Snowflake’s equity value effect ($0.86).”

The effect of mergers and acquisitions was more pronounced this quarter. It was the first quarter to fully reflect the performance of Slack, which was acquired in July. Revenue was $280 million, exceeding the market expectation of $250 million. The number of customers paying more than $100,000 increased by 44% year-over-year. Slack contributed to 4 out of the top 10 contracts by quarterly scale, enhancing synergy after integration. Data analytics tools MuleSoft and Tableau were separated into distinct business units starting this quarter, indicating their increased contribution. Researcher Cheolmin Kim from Samsung Securities explained, “Along with the earnings announcement, current COO Bret Taylor was appointed as co-CEO. Since he led the Slack acquisition, there is a high possibility that the company will further activate mergers and acquisitions in the future.”

The company forecasted fourth-quarter revenue guidance of $7.22 billion to $7.23 billion, expecting a 24% increase compared to the same period last year. However, this slightly missed the market expectation of $7.24 billion, and adjusted EPS was projected at $0.72 to $0.73, significantly below the expected $0.82. Researcher Cheolmin Kim said, “The main cause of the decline in adjusted net profit is estimated to be increased costs due to mergers, resulting in a $0.49 per share decrease effect,” adding, “In the third quarter, marketing and sales expenses increased by 31% year-over-year, exceeding the revenue growth rate, highlighting concerns.”

In the securities industry, it is judged that the stock price may be sluggish in the short term, but long-term growth potential will not be impaired. Although external issues such as Omicron and increased costs during the merger process may worsen margins, corporate IT spending forecasts are being revised upward again, and demand for cloud transition is strengthening. Researcher Yongmin Cho said, “The benefits of the customer relationship management (CRM) industry are expected to continue, and the industry benefits will be concentrated on the company,” adding, “It is important to note that the company’s market share in the CRM market is 19.5%, exceeding the combined market share of the 2nd to 5th ranked companies.”